Sony Ericsson meets pocket of resistance

The joint venture has already defied its critics once, writes Clayton Hirst, but now it must do the same again with an all-conquering 3G phone

Matsumi Ihara slides his chair away from the table and rummages in his jacket pockets. He pulls out a sleek mobile phone and carefully places it on the table. Ihara reaches into another pocket and produces another phone. Delving in his bag he reveals yet another top-of-the-range mobile - and another, until four phones are lined up neatly on the table in front of him.

Matsumi Ihara slides his chair away from the table and rummages in his jacket pockets. He pulls out a sleek mobile phone and carefully places it on the table. Ihara reaches into another pocket and produces another phone. Delving in his bag he reveals yet another top-of-the-range mobile - and another, until four phones are lined up neatly on the table in front of him.

Japanese businessmen are well known for their love of gadgets, but even by this standard, Ihara's habit is excessive.

But he can be forgiven. As president of Sony Ericsson, it is part of his job description to be well connected and to know the devices inside out. "I have all the phones made by Sony Ericsson," he says, before proceeding with an enthusiastic demonstration of their various bells and whistles: "This one has a high-resolution camera. This one, you can make a video and send it."

How the fortunes of Sony Ericsson have changed in a little over six months. The joint venture between Japan's Sony and Sweden's Ericsson was born in April 2001 with the lofty ambition of overtaking Nokia to become the number one handset maker by 2006.

But instead of becoming a world beater, the London-based company spent two years attempting to glue together two diverse businesses at the expense of its products, which at best were ordinary.

"I came from Sony, where you are expected to be the global number one player," says Ihara.

"When I started the joint venture, I brought this kind of spirit to Sony Ericsson. But when we looked at the business, it was performing below expectations. We really did not have a competitive product portfolio and our brand imaging was very confusing."

Today, Sony Ericsson has a 5.1 per cent share of the global market, behind Siemens, Samsung, Motorola and Nokia. Ihara reveals that Sony Ericsson has now abandoned its target of being number one by 2006. "It's just unrealistic," he says.

But before Christmas, Sony Ericsson hit back with a new range of phones based on its T610 model, the first mobile to be designed from scratch by the joint venture. This had an immediate effect on Sony Ericsson's bottom line. In its last set of quarterly results, the company reported an impressive 16 per cent surge in sales, helping it to post its first profit for over a year. Sony Ericsson's critics were silenced.

"For a long time you couldn't see the Sony stamp on the products. That is now very visible," says Ben Wood, an analyst at technology research firm Gartner.

"I was one of the people giving them a real kicking last year. But the T610 has turned out to be a killer for Sony Ericsson. Going into 2004, the joint venture is really starting to deliver. Sony Ericsson are definitely players now."

The upturn in Sony Ericsson's fortunes is well timed. Demand for new phones is surging. Consumers in Europe are beginning to trade in their old mobile phones for new models with colour screens, internet access and digital cameras. And new markets are opening in countries such as China, where mobile phone ownership is rocketing.

But some question whether Sony Ericsson has the supply of phones to meet the demand. In the run-up to Christmas, the company suffered a shortage of handsets and retailers complained that they were unable to satisfy consumer demand. Ihara blames this on Sony Ericsson's component suppliers, which he says didn't predict the sudden rise in orders for phones quickly enough.

Critics believe, however, that some of the blame should be laid at the company's feet.

One senior source at a UK mobile operator says: "Sony Ericsson suffered from a poor supply chain. Take the T610, for example. We never got the volumes we wanted and the company was poor at getting deliveries to us. Sony Ericsson claims to have fixed the problems. We will find out if this is true by Easter, when there is traditionally an increase in mobile phone sales."

If Sony Ericsson is to mount a serious challenge to its bigger rivals, it most conquer the market for 3G phones, which offer high-speed mobile internet access. Europe's mobile phone operators are preparing to launch 3G later this year and they will be keen to avoid repeating the mistakes made by Hutchison 3G. The company was the first to launch last year but it was dogged by technical glitches and poor handset supplies. The success, therefore, of 3G is very much in the hands of the phone manufacturers.

The early signs aren't promising: Vodafone has been particularly critical of the early 3G phones, which it says are bulky and have a poor battery life.

Sony Ericsson revealed its first 3G phone, the Z1010, a year ago and Ihara says it will go on sale in Scandinavia in a fortnight. A UK launch date has yet to be set.

"When it comes to the battery then it is almost comparable to an existing phone, and when it comes to full practical use then you won't be disappointed," he says. But he hints that further development may be required: "This is a completely new technology. It takes time before you finally get stable hardware and software. The technology is getting more complex and testing takes much longer."

This is where the Ericsson side of the joint venture has an opportunity to shine. The company is one of the leaders in developing 3G base stations and has a 3G-testing lab outside Stockholm that is the envy on the industry. "Here, Sony Ericsson really has a chance to come back to strength," says Wood at Gartner.

Unfortunately, not everyone is impressed with Sony Ericsson's first 3G offering. For the past few months, British mobile phone operators have been secretly testing Sony Ericsson's Z1010 handset. The verdict from one operator, who asks not to be identified, isn't flattering: "It's not the best. The phone is just too big."

The test, then, will be whether the phone makes it into Ihara's voluminous pockets in the coming weeks.